Posted on September 29, 2005 at 16:53:48:
When an old business vehicle needs to be replaced, a smart planner will most likely sell the car rather than trade it in on a new model. Why? Because there are real tax advantages.
The government’s depreciation schedule on an automobile—17 years, if it’s used exclusively for business—assumes a higher-than-market current value for the car. If the owner sells the car for less than its tax basis (cost less depreciation), there will be a deductible loss. On the other hand, if the vehicle is simply traded in, the IRS “reads” the transaction as an exchange, not a sale. Result: no deduction; the loss essentially is rolled over into the replacement vehicle. The owner not only loses the deduction for the loss, but reduces the price on which the next slow depreciation will be based.
Before selling, it’s a good idea to check out the price you can get on the old vehicle and compare it with its tax basis.